WRITTEN STATEMENT OF LESTER BRICKMAN, PROFESSOR OF LAW, BENJAMIN N. CARDOZO SCHOOL OF LAW OF YESHIVA UNIVERSITY

Transcription

1 WRITTEN STATEMENT OF LESTER BRICKMAN, PROFESSOR OF LAW, BENJAMIN N. CARDOZO SCHOOL OF LAW OF YESHIVA UNIVERSITY Before Subcommittee on Commercial And Administrative Law of the U.S. House of Representatives Committee On The Judiciary July 21, 2004 Mr. Chairman and members of the Subcommittee, I am Lester Brickman, a Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. I want to thank the Committee for inviting me to speak at this oversight hearing on the Administration of Large Bankruptcy Reorganizations: Has Competition for Big Cases Corrupted the Bankruptcy System? I will focus my remarks on the process of administering the major bankruptcies of former producers and sellers of asbestoscontaining products. My testimony will consist of the following: I. Qualifications...2 II. Asbestos Litigation: An Update...3 III. The Need For Congressional Oversight Hearings...4 IV. An Overview Of Asbestos Litigation...5 V. Asbestos Litigation: A Summary Of My Research Findings...15 VI. Bankruptcy: The Inexorable End Game Of Asbestos Litigation...17 A. Introduction...17 B. Asbestos Bankruptcy Trusts...19 C. The Effect Of The Adoption Of Section 524(g) Of The Bankruptcy Code...23 D. Pre-Packaged Bankruptcies A Pre-Pak Composite Pre-Packaged Asbestos Bankruptcies: An Assessment...32 E. Conflicts of Interest Does The Appointment Of A Futures Representative Cure The Temporal Conflict? The Role Of Gilbert Heinz In Prepackaged Bankruptcies The Role Of Joe Rice In The Combustion Engineering Bankruptcy...47 F. Issues In Bankruptcy Trust Administration...55 VII. Conclusion

2 I. Qualifications I have had a long-standing research interest in asbestos litigation. In 1991, on the basis of knowledge and expertise that I had acquired on the subject, I was requested by the Administrative Conference of the United States, an executive branch agency of the federal government, to draft a proposed administrative alternative to asbestos litigation and to organize a colloquy to consider and debate that proposal. As stated by the Chairman of the Administrative Conference: [W]e asked Professor Lester Brickman to prepare a paper proposing an administrative claims solution for comment and criticism by the panel, and we look forward to comments by the audience. Let me introduce Professor Brickman, who teaches law at Cardozo Law School, Yeshiva University. He is a leading authority in the area of attorney s fees and has written numerous articles on the subject. Professor Brickman became interested in the subject of asbestos litigation some years ago when he was hired as a consultant by one of the defendants in the asbestos litigation to review contingent fee issues. He has since had the opportunity to extensively review empirical data, case files, and other materials on the subject. Because of his work in this area, we asked Professor Brickman to draft a proposed administrative solution which our panelists have been invited to criticize. 1 Over the past fourteen years, I have devoted a substantial amount of time to research on asbestos litigation and have published four articles on the subject. 2 In these articles, I discuss the nature of asbestos-related disease; the history of asbestos litigation, including the phenomenon of the unimpaired claimant; the role of attorney-sponsored screenings; the effective hourly rates generated by contingent fee-financing of the 1 Administrative Conference of the United States, Colloquy: An Administrative Alternative To Tort Litigation To Resolve Asbestos Claims, October 31, 1991, Transcript at 4. 2 The Asbestos Litigation Crisis: Is There A Need For An Administrative Alternative?, 13 Cardozo L. Rev (1992); The Asbestos Claims Management Act of 1991: A Proposal To The United States Congress, 13 Cardozo L. Rev (1992); Lawyers Ethics And Fiduciary Obligation In The Brave New World Of Aggregative Litigation, 26 Wm. & Mary Envtl. L. & Pol y Rev. 243, (2001); On The Theory Class s Theories of Asbestos Litigation: The Disconnect Between Scholarship and Reality, 31 Pepp. L. Rev. 33 (2004). 2

3 litigation and the effect of those fees on the litigation; the use and effects of forum selection; the impact of mass consolidations; and the culmination of the litigation in the bankruptcy of many former producers and sellers of asbestos-containing products and the administration of that bankruptcy process. Finally, my qualifications as an expert on asbestos litigation, attorney-sponsored screenings, the formation and structure of asbestos bankruptcy trusts and the trust distribution procedures adopted by extant trusts as well as those proposed in pending bankruptcies, were confirmed after being challenged in a recent asbestos bankruptcy proceeding. 3 II. Asbestos Litigation: An Update Asbestos litigation remains a high growth enterprise. In 2003, more than 110,000 new claimants surfaced the most ever in a single year. Since each claimant files claims against approximately different defendants and bankruptcy trusts, this translates into approximately 5,000,000 new claims which will have been generated by just these claimants. While approximately 750,000 claimants have so far filed claims against over 8500 different defendants, it is estimated that 1,600,000 to 2,100,000 new claimants will yet emerge. 4 Moreover, while defendants and their insurers have so far paid out over 70 billion dollars, it is estimated that former asbestos-containing product manufacturers, owners of premises containing asbestos and their insurers will have to pay out an additional $130-$140 billion before the litigation is concluded. 3 In re Western Asbestos Co. et al., Debtors, 2003 Bankr. LEXIS 1894 at *3 (Oct. 31, 2003). 4 Letter from David Austern, President, Claims Resolution Management Corporation, Manville Personal Injury Settlement Trust to Hon. Patrick J. Leahy, United States Senate Committee on the Judiciary 2 (July 8, 2003) (on file with the author). 3

4 So far the litigation has accounted for approximately 70 bankruptcies including, in recent years, such companies as Owens Corning, W.R. Grace, Armstrong World Industries, Babcock & Wilcox, Federal Mogul and Combustion Engineering. I note that negotiations are currently underway in the Senate to remove the litigation from the judicial system and provide an alternative administrative resolution. No end is yet in sight, however, as what has become a weapon of mass business destruction cuts deeper and deeper into the American industrial process and product distribution system. If the litigation continues along its current path, many more bankruptcies will ensue scores if not hundreds of companies, big and small, will almost certainly succumb as will a number of insurance companies. III. The Need For Congressional Oversight Hearings This hearing is taking place at a time when there is mounting evidence that the processes of negotiating and administering asbestos bankruptcies have become deeply flawed and in need of both a full scale investigation and legislative changes. I need only refer to a few of the most recent events such as the accounts in the press and elsewhere of the troubling conduct of several Advisors retained by Judge Alfred Wolin which led the Third Circuit Court of Appeals to issue a writ of mandamus removing Judge Wolin from presiding over several of the major asbestos bankruptcies now underway. In addition, there is the resignation, under fire, of Professor Francis E. McGovern from the roles of mediator and advisor in a number of these bankruptcies, accompanied by his candid admission that the system is not only broken but that it is going to get worse as well as his chilling statement, presumably in reference to the proceedings he was witnessing 4

5 and participating in, including those before Judge Wolin, that [t]here are bad things going on here. 5 To properly assess how the bankruptcies of these and other former producers and sellers of asbestos-containing materials are being negotiated by the parties and administered by the courts, it is first necessary to have an understanding of the underlying litigation that has generated such an unprecedented number of bankruptcies and threatens scores if not hundreds of additional businesses. IV. An Overview of Asbestos Litigation The modern era of asbestos litigation began in 1973 when the United States Court of Appeals for the Fifth Circuit, responding to revelations of a conspiracy to suppress information regarding the hazards of asbestos inhalation, 6 allowed workers injured by exposure to asbestos to hold manufacturers of those products and others strictly liable for failure to warn that their products were unreasonably dangerous. 7 That holding enlarged what had been workers compensation claims against employers into products liability claims against manufacturers and others. Much of the ensuing litigation targeted the Johns-Manville Corporation, the principal miner of asbestos and the leading manufacturer of asbestos-containing material. In 1982, the company declared bankruptcy. After a protracted bankruptcy proceeding, the Manville Personal Injury Trust ( Manville Trust ) was established in the first Editorial (St. Francis of Asbestos), Wall St. J. June 15, 2004 at A14. See PAUL BRODEUR, OUTRAGEOUS MISCONDUCT (1985). Borel v. Fibreboard Prod. Corp., 443 F.2d 1076 (5 th Cir. 1973), cert. denied, 419 U.S. 869 (1974). 5

6 in a succession of approximately fifteen such trusts set up after bankruptcies of approximately 70 companies thus far in the course of asbestos litigation. To that point, most asbestos litigation involved seriously injured claimants: those stricken with mesothelioma, a deadly cancer, and serious cases of asbestosis which could also be deadly and at least were debilitating, where exposure and causation could readily be established. However, at the time of the creation of the Manville Trust, trends were already developing of plaintiffs seeking compensation based on increasingly deficient evidence of causation and injury. For example, plaintiffs advanced claims which included statements by doctors that claimants lung conditions were consistent with asbestosis, even though that is not a diagnosis and even though many causes other than exposure to asbestos can account for the same conditions. Plaintiff lawyers increasingly sought aggregations of claims that were of sufficient magnitude to force defendants to settle cases that they often would have won had they been individually tried, including cases that plaintiff lawyers never even would have brought but for the aggregation. A dominant feature of asbestos claiming from the mid-1980s to the early-mid 1990s was the prevalence of pleural plaque claims. The vast majority of those with pleural plaques have no symptoms, no diminished lung capacity, no greater likelihood of developing a malignancy than similarly exposed workers who do not have pleural plaques, and also a considerably diminished likelihood of thereafter developing asbestosis than others similarly exposed who have not been found to have pleural plaques. 8 In many jurisdictions, there is no legal basis for valuing such claims since no injury has occurred. Nevertheless, tens of thousands of these claims were filed, 8 See Lester Brickman, On The Theory Class s Theories of Asbestos Litigation: The Disconnect Between Scholarship and Reality, 31 Pepp. L. Rev. 33, 51-54, 60 (2004) (hereinafter Brickman, Theories of Asbestos Litigation). The article may be accessed at 6

7 consuming hundreds of millions of dollars that would otherwise have been available to injured claimants. A dominant feature of asbestos claiming today which has its origin in the earlymid 1990s is the enormous increase in the claims of 1/0 asbestosis by unimpaired persons. 9 This is occurring in the teeth of reports of leading medical researchers who have called asbestosis a disappearing disease, 10 and a condition that is exceedingly rare. 11 Other medical researchers have stated that we have not seen a single case of significant asbestosis with first exposure during the past 30 years. 12 Approximately 10% of asbestos claims involve malignancies. The substantial majority of the remaining 90% allege mild asbestosis and to a lesser extent, pleural plaques. 13 Most of these claimants have no lung impairment but are characterized as having an asbestos-related injury or illness or the basis of x-ray readings by certified specialists known as B-readers. Of the 91,000 new claims presented to the Manville Trust in 2001, approximately 90% were 1/0 asbestosis claims gathered by attorney sponsored asbestos screenings. Medical reports of consistent with asbestosis or diagnoses of 1/0 asbestosis were presented even though there are more than 150 causes of fibrosis other than asbestos exposure. 14 Among the other causes of lung conditions which 9 For an explanation of asbestosis and of the significance of a 1/0 x-ray reading on the ILO scale, see Theories of Asbestos Litigation, id. at 46-51, K. Browne, Asbestos-Related Disorders, Occupational Lung Disorders, 3 rd, 410 (1994). 11 Letter from Dr. James Crapo, Report Of The Senate Judiciary Committee on S.1125, The Fairness In Asbestos Injury Resolution Act of 2003, July 30, 2003 at Jederlinic & Churg, Ideopathic Pulmonary Fibrosis In Asbestos-Exposed Workers,144 Am. Rev. Resp. Dis (1991). 13 See Theories Asbestos Litigation, id. at 44-55,

8 can be read as 1/0 asbestosis are smoking, obesity, old age, lupus, silicosis and numerous other medical conditions. Virtually all adults in the U.S. have millions of asbestos fibers in their lungs, yet suffer no adverse affects on their health. Indeed, a sizeable portion of the adult population has lung conditions that could be diagnosed as [1/0] asbestosis, 15 One study indicates that 35.5% of a population not known to have industrial exposure to asbestos were nonetheless found to have lung conditions that could be diagnosed as asbestosis according to the standards used by the B-readers hired by plaintiff lawyers. 16 It has now been almost 30 years since large numbers of workers were exposed to high levels of friable asbestos fibers in the course of their employment. Based upon the latency periods associated with asbestos related diseases, rates of disease manifestation should have begun to significantly decline by no later than the mid-1990s. But contrary to the predictions of medical science and despite the medical studies indicating that the vast majority of claimants are misdiagnosed and do not have an asbestos-related injury recognized by medical science, 17 asbestos litigation continues to expand at a substantial rate. The reason for this has become clear. Most current claims of injury made in the course of asbestos litigation have little do with actual injury but rather are a function of the compensation system. If compensation is available, claims will be forthcoming. As a leading medical expert in asbestos-related diseases has stated: [c]laimants are being compensated for illnesses that, according to the clear weight of medical evidence, either are not caused by asbestos or do not 14 Hearings on Asbestos Litigation before the Committee on the Judiciary, U.S. Senate, Prepared Statement of Steven Kazan, Sept. 25, 2002, at 22 n.63 (hereinafter Kazan Statement) Kazan Statement, id. at 25. See Theories of Asbestos Litigation, id. at 107. Id. at

9 result in a significant impairment -- i.e., are not generally regarded by the medical profession as an illness. Projection of these claims is inherently uncertain. Simply put, when medical research concludes that a condition is not caused by asbestos, or is not an illness at all, medical research will not be able to predict the number of such claims. 18 Beginning in the mid-1980s and continuing to this day, asbestos litigation has become increasingly driven by the entrepreneurial activity of plaintiff lawyers who sponsor mass recruitment efforts by enterprises created by individuals with no background in health administration, specifically and solely to generate claims. It is important to note the great divide between asbestos screenings and medical screenings. The latter seek to detect early signs of disease for the purpose of instituting a regime of treatment. Asbestos screenings, conversely, are not intended to and do not provide any material health benefits; rather they are intended primarily to identify and recruit litigants. This has generated tens of millions of dollars in fees and payments to screening enterprises and the doctors they employ and billions of dollars in fees for lawyers. As one asbestos plaintiff lawyer has acknowledged, attorney sponsored mass screenings are different from the model of traditional toxic tort litigation [,which] follows a medical model: a plaintiff sees a doctor to treat his illness of injury and then is referred to, or otherwise finds, a lawyer. [Asbestos] screening substitutes an entrepreneurial model: the lawyer recruits the plaintiff -- who usually feels fine, has no symptoms or impairment, and is unaware of any injury -- and sends him to a screening company for an x- ray. 19 Substantially all nonmalignant claims being brought today are generated by those screenings. So far these entrepreneurial enterprises have organized screenings of 18 Letter from Dr. James Crapo to Senator Jon Kyl, June 23, 2003, quoted in Senate Judiciary Committee Asbestos Report, id. at Kazan Statement, id. at (emphasis added). 9

10 upwards of one million industrial plant and construction workers who could claim exposure to asbestos containing products at their job sites before The enterprises contact union locals who cooperate in setting up screenings because they can provide union members with a little cash to add to their retirement funds, or to buy the fishing boat; as one screened worker noted, It s better than the lottery. If they find something, I get a few thousand dollars I didn t have. If they don t find anything, I ve just lost an afternoon. 21 With such promotional come-ons as Find out if YOU have MILLION DOLLAR LUNGS, millions of mailings announcing the screenings have been sent out to employees and former employees promising free x-rays and the opportunity to cash in even though they were not sick and exhibited no symptoms. Mobile x-ray vans are brought to union halls, motels, strip malls, etc. to take x-rays at an assembly line rate of one every five minutes. A select few handfuls of B-readers and doctors cooperate with the enterprises by diagnosing massive numbers of those screened as having asbestosis or conditions consistent with asbestosis. For those so diagnosed, pulmonary function tests, ostensibly to measure lung impairment, are then administered. As part of the screening process, plaintiff lawyers retain B-readers with heightened propensities to diagnose x-rays taken at the screenings as indicating an ILO grade of 1/0 asbestosis. Doctors interviewed by the American Bar Association Commission on Asbestos Litigation reported having seen hundreds or even thousands of examples of over-reading of x-rays for litigation purposes. 22 One doctor reviewed the 20 The operations of screening enterprises are examined in detail in Theories of Asbestos Litigation, id. at Andrew Schneider, Asbestos Lawsuits Anger Critics, St. Louis Post-Dispatch, Feb. 11, Report of the American Bar Ass n Com n on Asbestos Litigation, Feb. 2003, at

11 medical records of 15,000 people who had been diagnosed with asbestosis based solely on x-ray readings, and determined that only 10% of the persons could validly be diagnosed with asbestosis. 23 Another doctor reported a 62% error rate on review of x- ray screening results previously read as consistent with asbestosis, 24 and a third doctor reviewed 22,000 asbestos-related claims and found a presumptive x-ray review error rate of up to 86% among 5 readers, none of whose results matched the general patterns in epidemiological studies. 25 While x-rays can reveal fibrosis, x-rays cannot measure the existence, degree or severity of pulmonary dysfunction or whether the condition is obstructive or restrictive. In addition, a complete medical examination and work history would be required in a medical setting to determine whether a fibrosis has been caused by exposure to asbestos as opposed to exposure to other dusts, such as silica or cotton dust. Pulmonary function is measured by performance on a variety of breathing tests called pulmonary function tests ( PFTs ). These tests, when properly administered, provide objective, quantifiable measures of lung function to determine whether an individual is impaired and, if so, to what degree. They are the primary means of evaluating non-malignant asbestos-related personal injury claims and are widely used by both plaintiffs and defendants to determine the settlement values of claims and as evidence in trials. There is considerable evidence that PFTs administered by attorney sponsored asbestos screenings systematically and deliberately deviate from standards established by Id. Id. Id. 11

12 the American Thoracic Society ( ATS ) in order to generate PFT results which falsely indicate pulmonary impairment. According to testimony of screening company representatives and the B-readers and other doctors hired by plaintiff lawyers, 20-35% of those processed by attorney sponsored asbestos screenings are found to have 1/0 asbestosis. This percentage is itself evidence of systematic misdiagnosis of asbestosis. As noted, neutral medical doctors and scientists declared asbestosis a disappearing disease a decade ago. Moreover, studies done a decade ago indicate that the percentage of actual asbestosis to be found in mass screenings of industrial worker is in the range of 2.5%. 26 On the basis of research that I have undertaken, I have concluded that the actual percentage of those screened at attorney sponsored asbestos screenings who are found positive on the basis of x-rays is in the 60-80% range and, of those, 60%-80% are found impaired on the basis of pulmonary function tests administered at the screenings. 27 This is near conclusive evidence of manifest misdiagnosis on a mass scale. The most reasonable explanation why diagnoses of asbestosis generated by attorney sponsored asbestos screenings exceed actual rates of asbestosis by margins of 50:1-100:1 is the financial incentives that permeate the screening process. These incentives include: 28 a) The screening enterprises which generate the x-rays for B-readers and which administer pulmonary function tests operate at a furious pace since volume equals income. The resultant poor quality of x-rays renders misdiagnosis more likely since 1/ See Theories of Asbestos Litigation, id. at Id. at Id. at

13 asbestosis is itself often a highly subjective judgment. In addition, PFTs administered at screenings fail to comply with ATS standards, and frequently are misadministered both to increase the volumes of such tests in a given time period and to generate false outcomes of impairment. b) Some screening enterprises are paid substantially higher fees for each positivefor-asbestosis outcome they produce for the lawyers who hire them than for each negative outcome. c) Although many B-readers charge relatively low fees per x-ray, the income that they generate in the aggregate from such readings is substantial -- in the millions of dollars for the selected few because of the high volumes. This financial incentive has profound effects. Though there are approximately 500 B-readers in the United States, only a few handfuls have been selected to read x-rays by plaintiff lawyers. According to the Manville Trust, 49.6% of the tens of thousands of non-malignancy claims it receives that identify a doctor are based on the B-reads of just 10 doctors. These B-readers reliably find 1/0 asbestosis even though neutral readers conclude that the error rates are huge: well over 50%. B-readers who reliably read x-rays as indicating 1/0 asbestosis are rewarded with increased business. Indeed, there is specific empirical evidence that the B- readers most often selected by plaintiff lawyers conform their readings to the specific demands of the law firms that retain them. And if, in the unlikely case that the doctor does not give the lawyer the right answer [i.e., 1/0 asbestosis], the lawyer can get a second opinion, or a third, or a fourth... as many as it takes. 29 Indeed, one doctor who regularly testifies as an expert for plaintiffs stated that in some of the screenings, the 29 Kazan Statement, id. at

14 worker s x-ray had been shopped around to as many six radiologists until a slightly positive reading was reported by the last [doctor]. 30 That many of the medical reports and diagnoses produced by attorney sponsored asbestos screenings lack accuracy is further buttressed by analysis of the massive shift from findings of pleural plaques to findings of asbestosis. From the late 1980s to the early 1990s, pleural plaque claims accounted for approximately 45-60% of asbestos claim volumes. Beginning by the mid-1990s, a massive shift in the mix of claimed diseases occurred. B-readers essentially ceased finding pleural plaques in x-rays and instead found 1/0 asbestosis or conditions consistent with asbestosis. Thus they were diagnosing new claimants as having asbestosis or conditions consistent with asbestosis, not pleural plaques, even though these claimants had worked alongside other claimants at identical work sites at the same times who were previously determined by B-readers to have pleural plaques, rather than asbestosis. 31 The explanation for this tectonic shift in medical reporting is that, as earlier indicated, asbestos claiming today is largely a function of the compensation system, not of medical science. More specifically, the global Georgine settlement, 32 later invalidated by both the Third Circuit Court of Appeals and the U.S. Supreme Court, 33 included provisions that would have effectively valued future pleural plaque claims at zero. In reaction to the settlement, other plaintiff lawyers immediately began reclassifying what would have been new pleural plaque claims as asbestosis claims -- a phenomenon that David Egilman, Asbestos Screenings (letter), 42 Am. J. Indus. Medicine 163 (May 2002). See Theories of Asbestos Litigation, id. at Georgine v. Amchem Products, Inc., 878 F. Supp. 716 (E.D. Pa. 1994). Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), aff g 83 F. 3d 610 (3d Cir. 1996). 14

15 compellingly suggests that prior claimants, so diagnosed, did not have pleural plaques, and that current claimants being diagnosed with 1/0 asbestosis or conditions consistent with asbestosis do not have asbestosis. Faced with the unprecedented deluge of claims generated by attorney sponsored asbestos screenings supported by B-readers unsupportable declarations of asbestosis or consistent with asbestosis and systematically misadministered PFTs, as well as the enormous defense costs that were being incurred to defend against these claims in numerous jurisdictions, often simultaneously, several defendants attempted to control the rate of claiming and the expenses they were incurring by entering into agreements with plaintiff lawyers to settle their current inventory of cases and new claims, as they would arise, according to an agreed upon matrix of claim values. These attempts to tame litigation costs failed, as attorneys took advantage of lax--and even nonexistent--claiming requirements to assert hundreds of thousands of claims that lacked actual medical diagnoses and competent evidence of exposure. V. Asbestos Litigation: A Summary of My Research Findings On the basis of my research, I have concluded that asbestos litigation today mostly consists of: (1) a massive client recruitment effort accounting for 90 percent of all claims currently being generated and resulting in the screening of well over 1,000,000 litigants in the past 15 years; (2) generating claims of injury though most of these litigants have no medically cognizable asbestos related injury and cannot demonstrate any statistically significant increased likelihood of contracting an asbestos-related disease in the future; 15

16 (3) which claims are often supported by specious medical evidence, including: (a) evidence generated by the entrepreneurial screening enterprises and B-readers specially certified x-ray readers that the plaintiff lawyers select, for producing diagnoses which are not a product of good faith medical judgment but rather a function of the millions of dollars a year in income they receive for these services, and (b) pulmonary functions tests which are often administered in knowing violation of standards established by the ATS and consequently result in findings of impairment which would not otherwise be found but for the improper administration of these tests; (4) and which claims are further supported by litigants testimony which frequently follows scripts prepared by their lawyers which are replete with misstatements with regard to: (a) identification and relative quantities of asbestos-containing products that they came in contact with at work sites, (b) the information printed on the containers in which the products were sold, and (c) their own physical impairments; 34 (5) being asserted in a civil justice system that has been altered to accommodate the interests of these litigants and their lawyers by dispensing with many evidentiary requirements and proof of proximate cause, giving rise to what I have termed special asbestos law. 35 It is thus beyond cavil that asbestos litigation represents a massive civil justice system failure. Indeed, in my study, I conclude that the litigation has become a malignant enterprise These conclusions are documented in Theories of Asbestos Litigation, id. Id. at

17 VI. Bankruptcy: The Inexorable End Game of Asbestos Litigation A. Introduction An increasing amount of asbestos claiming is now being channeled through the bankruptcy process where such proceedings are largely insulated from public view. The issues are complex and newspaper coverage fails to inform the public of what is occurring which, in plainest terms, amounts to a perversion of legal process. The leading plaintiff law firms, a baker s dozen or so, exercise substantial if not near total control over the bankruptcy process. While Congress has granted the U.S. Trustee authority to select the members of the various committees, which includes the members of the asbestos creditors committee ( ACC ), 36 in reality, it is the leading plaintiff law firms that select themselves onto the ACC. To be sure, the U.S. Trustee does select tort creditors to be on the ACC but the practice is for those members to cede control to their attorneys through powers of attorney. The appointed members of the ACC immediately fade from view. Laden with boundless conflicts of interest which are largely ignored by bankruptcy judges and the U.S. Trustee, this handful of law firms not only constitute the asbestos creditors committee, they create the bankruptcy plans, establish the criteria for the payment of the very claims which they are asserting, effectively select the trustees to operate the 524(g) bankruptcy trusts that will be created to actually pay the claims (with the approval of the bankruptcy court which virtually always is forthcoming) and constitute the Trust Advisory Committees which have authority over trustees actions and veto power over changes in the trusts structure. The Trust Distribution Procedures ( TDPs ) they create allow these lawyers to treat substantial portions of the trusts funds U.S.C

18 as piggy banks, essentially accessible at will irrespective of whether a claimant is actually injured or had actual exposure to defendants products, let alone whether the exposure was a substantial factor causing injury. In fact, in some bankruptcy TDPs, all that is required to prove the requisite exposure is for the claimant to sign a form saying he was exposed. The bankruptcy trusts are being created as a result of the enactment by Congress in 1994 of 524(g), a special set of bankruptcy provisions designed to facilitate the reorganization of firms with asbestos liabilities. 37 Under these provisions, the asbestos claims against an insolvent debtor are channeled to a trust which is funded by equity provided by the debtor and increasingly, by the debtor s insurance coverage. As I will explain in this statement, in practice, this provision richly rewards lawyers for recruiting claimants, especially those who have no injury, let alone a lung impairment resulting from exposure to asbestos, and is further being applied in a perverse manner which subverts its purpose as well as the larger purposes of the Bankruptcy Code. Though bankruptcy trust assets already approximate $6 billion, that amount pales when compared to an additional anticipated $40 billion to be added to trust assets 38 as up to a score of companies now in bankruptcy, including Owens Corning, W.R. Grace, Armstrong World Industries, USG, Combustion Engineering, Congoleum, Burns & Roe, Pittsburgh Corning, Federal Mogul, G-I Holdings (the former GAF), Babcock & Wilcox, U.S.C. 524 (g)-(h). 38 The actual amount to be added to these trusts may be less than $40 billion because several insurance companies which will be contributing funds to the trusts are likely to be bankrupted by their asbestos liabilities. Moreover, one or more reinsurance companies may decide to abandon the American market rather than continue to pay out huge sums for asbestos liability. Few insurance companies, if any, have established reserves sufficient to fund their anticipated asbestos liabilities. 18

19 and DII Industries and Kellogg Brown and Root, 39 subsidiaries of Halliburton, establish such trusts. When that occurs, piggy banks with approximately $45 billion in assets will be in place which plaintiff lawyers will be able to tap essentially at will. B. Asbestos Bankruptcy Trusts Approximately fourteen bankruptcy trusts have been established thus far in the course of the more than 70 bankruptcies of companies faced with substantial asbestos liabilities. Most of these bankruptcies have resulted from the overwhelming number of claims as described above and the settlement postures forced onto defendants. As a plaintiff lawyer specializing in asbestos claims has observed, prior to bankruptcy defendants are often force[d] to... settle... cases whether or not they have merit under state law. 40 Unfortunately, the advent of bankruptcy does not resolve the problem of overwhelming numbers of meritless claims. Instead, an analogous set of problems surface when these claims are presented to the trusts created in the aftermath of bankruptcies. Because the bankruptcy trust creation process historically has been largely dictated by plaintiff lawyers, the trusts have not been structured to effectively distinguish between valid claims by plaintiffs who are actually sick as a result of exposure to debtors products and the hundreds of thousands of invalid claims brought by unimpaired asymptomatic claimants or claimants lacking significant exposure to debtors products. Instead, these trusts have been structured to favor the interests of the lawyers controlling 39 This restructuring plan was approved on July 16, 2004 and provides for payment of $4.2 billion into the bankruptcy trust. 40 Kazan Statement, id. at

20 the creation of the trust by paying their claims earlier and at higher levels than claims which arise later in the process, without regard to merit or causation. This has resulted in the rapid depletion of trust assets. The first and largest of the bankruptcy trusts, the Manville Trust ( MT ), was established in 1988 with the transfer of almost $2 billion in Johns-Manville assets after the latter s bankruptcy filing in The MT was structured by the lawyers who had the greatest number of claims against the company. These lawyers were appointed to what was officially called the Asbestos Health Claimants Committee, a committee consisting of 26 plaintiff attorneys and one claimant. As noted in a very detailed and insightful examination of the Manville Trust s origin, [b]ecause [these] committee members would take home a portion of any settlements, they had more than the usual vested interest in the bankruptcy s outcome. 41 The stated purpose of the MT was to establish an administrative process that would deliver fair, adequate and equitable compensation to present and future asbestos claimants without the need for litigation. This goal was to be effectuated by the Manville Trust Distribution Procedures ( MTDP ), which provided that claimants would be paid a fixed sum in accordance with the classification of the condition upon submission of minimal proof of exposure to a Manville product and the existence of an asbestos related medical condition. Thus, the MT was structured in favor of ease of filing at the expense of accuracy in claiming. This accorded with the interests of the plaintiff lawyers who structured the MT. They had devised a plan which was doomed to fail, 42 but which Amy Singer, Leon Silverman, His Clients, The American Lawyer, Oct. 1990, at 58, 60. Id. at 58 20